Tuesday, August 30, 2011

Actual Proof Tax Incentives Don't Work

I have to admit I didn't really know to much about tax incentives until recently, although the idea rubbed me the wrong way. Well, the talk about "Project Soccer" in Brunswick motivated me to learn a bit more about it. Needless to say, just a few minutes of research overturns the pro-tax incentives argument.

When Flextronics was deciding on a location for its primary East Coast industrial campus, Atlanta, Georgia, reportedly offered it a total of $20 million in direct corporate incentives. By contrast, Franklin County, North Carolina, offered $5.5 million, over $3 million of which would go for retraining local textile workers for the technically sophisticated jobs at the local community college.3 To the surprise of many, Flextronics eventually decided to expand its small operations in Franklin County despite the temptation offered by the rival southern state. As one Flextronics manager mentions in an interview, the high quality of the personnel, the opportunities for retraining, the proximity of clients in the RTP area and the warm relations with the local government played an important role in the decision.4

[...]A survey taken in 2000 by Rondinelli and Burpitt found that international company executives operating in North Carolina placed government tax incentives, agency assistance and financing close to the bottom of the 11-item list of factors that managers felt to be influential in their location decision.5

[...]Also, the practice might be abused by companies. For example, they might withhold their decision to locate in a state until the maximum possible amount of "incentives" is doled out, or they might use the threat of moving out to blackmail the communities where they are located. The latter was the case of RF Micro Devices, which received $2 million in 1999 from Greensboro to prevent it from relocating to China.6

[...][S]ince these benefits are geared towards large and highly visible enterprises, it is discriminatory towards small businesses, which employ a large segment of the labor force and may even have better growth prospects than big manufacturers.

[...]The Lee Act was passed in 1996 in order to promote investment and job creation in the less developed regions of the state [NC]. It separated the counties into tiers, with job creation and investment tax credits increasing dramatically if done in a less developed county. A job created in a prosperous region can bring as little as $500 in tax credit; the same job in one of the poorest counties can in fact bring $16,500.8

The impact, however, turned out to be different than anticipated: two-thirds of the more than $60 million of credit claimed in 2001 were awarded to the top counties, with those at the bottom barely receiving anything.

In 2006, Michael LaFaive and Michael Hicks, formerly a professor at Marshall University and currently a senior fellow for the Public Policy Foundation of West Virginia, conducted a study of MEGA [Michigan Economic Growth Authority] to gauge the success of the program during the past 10 years. Their findings supported the ever-growing consensus among economists and tax experts that tax incentives fail to fulfill their promise of creating new jobs or retaining existing ones.

[...]Since 1996, MEGA has put together 230 incentive agreements. Under these agreements, 127 projects should have produced 35,821 direct jobs by 2005. In fact, these deals have produced about 13,541 jobs, or 38 percent of original expectations.

[...]Following an exhaustive study, Hicks and LaFaive produced five findings.

First, MEGA's incentive packages did not improve Michigan's per-capita personal income, employment or unemployment rate. Second, MEGA did not improve the per-capita income, employment or unemployment rate of any county in Michigan. In each county, the researchers estimated the range of impact somewhere between zero and modestly negative.

Third, Michigan counties that did not have companies receiving MEGA incentives performed as well, economically, as those counties that received the benefits.

Fourth, MEGA did not affect the aggregate income or employment in manufacturing and warehousing -- two of the major areas that the incentives targeted.

Fifth, MEGA caused a temporary shift to higher construction employment without increasing overall employment. MEGA incentives created one temporary construction job for every $123,000 in MEGA credits provided. In regard to these construction jobs, 75 percent disappeared after one year, and the remaining 25 percent were gone in two years.

[...]The results of the Michigan study are not unique and are for the most part consistent with every other study that has looked at the economic effect of government-subsidized incentives.

[...]From a tax standpoint, implementing a low rate, broad-based tax system provides the best environment for economic growth.

North Carolina ranks 37th in the nation when it comes to the 'business-friendliness' of their tax code in the Tax Foundation's State Business Tax Climate Index, a measure of how each state's tax laws affect economic performance. They rank last in the region, behind West Virginia, Virginia, Kentucky, Tennessee, South Carolina and Georgia.